Archive for the ‘Sydney Housing Bubble’ Category

ANZ is the first bank to move, increasing mortgage rates for investor loans by 27 basis points effective from August 10. The bank says it is following instructions from the banking regulator, the Australian Prudential Regulation Authority (APRA).

According to figures from the Domain group, Sydney house prices surged 22.9 per cent in the last year, the fastest pace since the 1980’s.

The surge, surpassing growth recorded in the 2001 and 2002 booms according to the Domain’s Dr Andrew Wilson, takes the Sydney median house price past the $1 million mark, making it more expensive than London.

The bubble continues to create an increasing challenge for regulators. Reserve Bank Governor Glenn Stevens stressed yesterday in an address to the Anika Foundation Luncheon titled “Issues In Economic Policy”, that we need to take a longer term view of momentary policy and the implications of record low interest rates. Stevens remarked:

The risk, however, is that this process can lead to a mindset in which policymakers end up responding to quite short-term phenomena, using instruments that take quite some time to have their full effect, including effects that might actually turn out to be adverse.

Stevens is warning any benefit in dropping interest rates now to support jobs and growth is likely to be outweighed by fueling the housing bubble, that could collapse with far more devastating and adverse results.

It is not quite good enough simply to say that evidence of continuing softness should necessarily result in further cuts in rates, without considering the longer-term risks involved. Monetary policy works partly by prompting risk-taking behaviour. In some ways that is good: in some respects, there has not been enough risk-taking behaviour. But the risk-taking behaviour most responsive to monetary policy is of the financial type. To a point, that is probably a pre-requisite for the ‘real economy’ risk-taking that we most want. But beyond a certain point, it can be dangerous.

Reading between the lines, while the housing market bubble in Sydney and Melbourne, two of Australia’s largest markets remains out of control, we can expect to see any changes to the official cash rate on hold as the economy slows and unemployment ticks up. Stevens also remarked, growth of less than three per cent will be the new normal for Australia.

Australia’s record low interest rate environment has been a challenge for financial regulators trying to cool asset bubbles such as residential housing. Fear of buyers taking on too much cheap debt when interest rates are at record lows is thought to be keeping some regulator’s awake at night, as household debt to household disposable income metrics balloon to record levels.

Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft has told a Senate estimates committee, borrowers need to do their sums on a mortgage rate of 7 percent, not 4 percent as interest rates won’t stay low forever.

The banking watchdog, the Australian Prudential Regulation Authority (APRA), has been instructing banks to perform loan serviceability stress tests at an interest rate floor of 7 per cent, a buffer for when rates eventually rise. Banks such as ING Direct have been stress testing their borrowers’ at an 8 per cent interest rate floor.

So you can imagine the surprise today when Reserve Bank of Australia senior research manager Peter Tulip delivered preliminary results of his research showing Australian house prices are undervalued by 30 percent, simply because interest rates have plunged in recent times as the economy slows and jobs are lost. Dr Tulip makes this assessment on the assumption house prices were “fairly valued” last year.

As Sydney and Melbourne house prices rocketed in the last twelve months, notching up double digit gains multiple times that of inflation, interest rates have fallen from 2.5 per cent to just 2 per cent, a twenty percent fall.

Tulip said, “We find that owning a house costs 30 per cent less than renting,” with little consideration on what happens when interest rates rise from the depths of a 60 year record low during the 20-25 year term of a mortgage.

As widely expected, Australia’s central bank decided today to leave the official cash rate unchanged at 2.0 per cent. In the statement following the policy decision, the Reserve Bank, as it has done over the past couple of months, reiterated “The Bank is working with other regulators to assess and contain risks that may arise from the housing market.”

Effective tomorrow, Westpac will require all new property investors to put down a deposit of at least 20 per cent, while ANZ will require a minimum 10 per cent deposit.

The moves by Westpac and ANZ follow NAB’s decision last month to cap maximum loan to value (LVR) ratios for property investors at 90 per cent. Early last month, ING Direct capped LVRs to the more exuberant NSW property investor at 80 per cent, leaving property investment loans to the rest of the country capped at 90 per cent. Commonwealth Bank subsidiary, BankWest was one of the first banks to move, capping Australia wide property investor LVRs at 80 percent in May.

The banking regulator’s statistics for May, published this time last week, showed ANZ, CBA, NAB and Westpac grew property investor loans by 10.6 per cent, 9.9 per cent, 14.1 per cent and 10 percent respectively year on year, some exceeding the 10 percent speed limit imposed by the regulator. The other “advanced” bank, Macquarie should have received a handful of demerit points companying its 86.8 per cent speeding ticket.

‘Crazy’ value agnostic investors continue to leverage up in an environment of poor rental growth, according to investor mortgage finance commitments released by the Australian Bureau of Statistics on Friday.

In the year to April, NSW property investors have borrowed $64.2 billion to spurge on the residential property market, another all time record.

This comes as CoreLogic RP Data also released data on Friday showing rents are now rising at their slowest annual growth on record, caused by the surge in property investment. According to the ABC, “Bureau of Statistics figures show it is 20 years since rental growth has been this low nationally.”

An open letter from Mel Wilson, Human Resources professional and mother of two from Wodonga, Victoria to Treasurer Joe Hockey. Please share Mel Wilson’s facebook post here.

Dear Joe,

I just wanted to touch base with you regarding your comment that young people are able to enter the property market if they just “get a good job that pays good money.”

I just wanted to ask you how one might go about this?

Are you going to be reviewing all the current Awards that are in place to ensure that most jobs pay “good money”?

Are you going to be creating hundreds of thousands of new jobs that, under your Awards, pay over $100,000 per year?

Apologies if I have missed this fantastic news, but as someone working in 2 senior HR roles, I believe I would have known about this so that I could pass the message on to some very tired, over qualified employees who currently fall under various Federal and State awards and are being paid between $18 to $25 per hour.

Are you aware of what the average Australian wage is?

Are you aware of what the average Australian mortgage in Sydney is?

Are you aware of the first-home buying process?

Just in case these facts and figures aren’t available to you, I thought you might be interested.

The average weekly wage according to the Australian Bureau of Statistics on 1st January 2015 was $1,128.70, or $58,692.40 before tax. This means a take home amount of about $904.00 per week.

The median house price in Sydney, according to the Domain Group Housing Price Report, as of March 2015, was $914,056.

Not sure if you know how first home buying works at the moment, but you normally need a deposit of about 20%. This is to pay for the Stamp Duty (which is a State Tax you must pay every time you buy a property), and also to assist in the approval process so that you don’t need to pay Lenders Mortgage Insurance.

So in this instance, the first home buyer would need about $182,811.00 saved to purchase a house that is the average price in Sydney.

So to go out and get one of these “good jobs that pay good money” I assume these young people you speak of would need to go to university first.

On average, it takes about 3 -4 years to get a degree, so if a young person goes to University straight out of school, they can expect to finish their course and be ready for the workforce at about 21, with a HECS-HELP debt of over $20,000. To make this a bit easier for you to understand, let’s say there is a young person named Joe Junior who has done just this.

If Joe Junior is extremely lucky, and is up there with the best of the graduates from that course and that year, he will get a job straight out of University paying usually under the average wage.

However, lets just be extremely generous here and say that Joe Junior got a job and was on the national weekly take home wage of $904 per week.

Joe Junior needs to only save every single dollar worked for about 4 years to save his $182,811 deposit for their first home. Thank you, Mr Hockey, for throwing in that $7,000 first home owner grant too – that meant Joe Junior could get into his first home 8 weeks earlier!

Just a quick side note, this example does not take into consideration the rising house prices, or Joe Junior’s HECS-HELP debt that he obtained from getting his degree to get one of your so-called “good jobs”.

Joe Junior is now 25 (not so junior anymore), has been living at home with his parents this entire time and has not been able to spend a single dollar on any bills, board or holidays or public transportation. He also can’t afford a car or petrol for a car but then again “poor people don’t drive cars”. Oh wait, Joe Junior isn’t a poor person – he has a “good job that pays good money.”

Luckily Joe Junior’s parents have been happy to drive their little Joe Junior to and from work every day and provide free housing, clothing, medical expenses and also provide the food for his breakfast, lunch and dinner each day.

So finally Joe Junior has saved his $182,811 deposit (of which only about half will go towards his mortgage due to the stamp duty cost), and can now purchase his first home, with a mortgage of about $822,650.00.

According to the Commonwealth Bank’s online mortgage estimator, the repayments for a mortgage of this amount are $1,073.00 per week over 30 years.

So hopefully Joe Junior’s average weekly wage of $904.00 has gone up enough to cover the cost of the mortgage.

Joe Junior has been applying for these “good jobs hat pay good money” that you speak of (I assume by “good money” you mean more than the average wage as you have just seen it is not even enough to cover the cost of the average house prices’ mortgage in Sydney), but hasn’t had any luck as yet. He needed to stay in the same job post university to demonstrate to the bank job stability so that he could purchase his first home. So he only has a degree, and experience in the one job, one industry, and there are just not that many jobs out there paying “good money.”

Joe Junior now also can’t wash his clothes, eat food, or get to and from work as he no longer lives with his parents, so getting one of these “good jobs” is even more difficult.

So Joe Senior, are you really aware of all the facts and figures when you says things like buying your first home is “readily affordable” to young people?

Just slightly confused as to what you were thinking when you said these words at the media conference in Sydney.

Looking forward to another one of your politically correct, direct and well thought out responses.

Treasury secretary John Fraser told a senate hearing today he has no doubt there is a property bubble in Sydney.

“When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney. Unequivocally,” he told the hearing.

He warns bubbles have also formed in many parts of Melbourne, “Certainly I think that’s the case in the higher priced areas of Melbourne, and I base that on my own observation as well as the data,”

The warning follows a recent comment from ASIC Chairman Greg Medcraft, “History shows that people don’t know when they are in a bubble until it’s over”

Financial regulators have been working behind the scenes in recent months to implement macro prudential controls aimed at cooling the housing bubble and reducing the impact of a pursuing banking crisis. To their disappointment, little has been working. It is expected the RBA will hold off cutting the official cash rate when they meet tomorrow, waiting for any tangible evidence the first round of macro prudential controls is having an effect.

Sydney and Melbourne residential property markets could already be in a bubble according to the chief of Australia’s Investment and Securities regulator. Talking to the Australian Financial Review this week, ASIC Chairman Greg Medcraft said “History shows that people don’t know when they are in a bubble until it’s over” warning, in particular, that many Self-Managed Super Funds (SMSFs) could be exposed to a conceivable correction.

For most economists examining housing finance figures, this comes as no surprise. Recent data from the Australian Bureau of Statistics (ABS) show value agnostic investors have been piling into the Sydney and Melbourne market like no tomorrow, and as rents continue to fall.

Medcraft’s warning for SMSFs won’t come as a surprise to the National Australia Bank (NAB) either. The NAB quietly exited lending to self-managed superannuation funds early this month. With limited recourse borrowing, the risks were just too great. According to a report in the Australian, a NAB spokesperson declined to comment, outside of a statement saying the bank is “constantly assessing its product offering through our risk appetite and the broader regulatory environment.”

ANZ has indicated it has no exposure to SMSFs.

Activity below the radar

Fears of a housing correction impacting the stability of Australia’s banking system has forced the banking regulator to secretly act. As we reported in March (‘APRA to keep banking crackdown secret‘) the chairman of the Australian Prudential Regulation Authority, Mr Wayne Byres said the regulator was unlikely to ever disclose what capital controls it will impose on individual banks who do not exercise prudence. He told the house economic’s committee:

Prudential regulators are traditionally the people who try to operate behind the scenes—below the surface, below the radar. Financial institutions survive and thrive because they have confidence and the community has confidence in them, and you are happy to put your money into the bank, you are happy to take out your insurance policy and you are happy to invest your superannuation money because you have confidence that, when the time comes, you will get your deposit back, your policy will be paid and your super money will be there.

Unfortunately no institution is perfect, and sometimes issues arise. Prudential regulators tend to try to operate behind the scenes to get issues fixed and to avoid them becoming a source of concern to the community. If we can do that well and head off problems before they become serious problems, that is actually reinforcing of financial stability, because it is preserving the confidence that exists in the system.

The Reserve Bank of Australia (chair of the council of financial regulators) had been waiting on the many proposed macro-prudential controls to be implemented before it further slashed the cash rate, at the risk of fuelling the credit fuelled asset bubbles. On the eve of the rate cut this month, Westpac announced conformance with APRA requests. The bank said it would apply stricter loan serviceability tests to new property investor loans and tighten lending to foreign investors.

While the industry is tight lipped and potentially overwhelmed about all the new lending restrictions, brokers have indicated the National Bank, Commonwealth and Westpac have all removed package discounts to investors and tightened serviceability requirements. Negative gearing tax flows have been removed from serviceability requirements. Assumptions on rental incomes have been slashed.

Brokers also report two of the major banks have slashed maximum loan value ratios (LVR) for loans to non-residents from 80 to 70 per cent.

Two weeks ago, NAB went to the market, cap in hand, to raise $5.5 billion, one of the largest capital raising in history. $3.4 billion will be sunk into the troubled Clydesale Bank in the United Kingdom, leaving a spare $1.5 billion left over to bolster the balance sheet back home.

Westpac on the other hand has announced plans to raise an additional $2 billion capital through a dividend reinvestment scheme.

CLSA’s bank analyst Brian Johnson has suggested the big four require an injection of more than $41 billion in additional capital over the next coming years. According to his estimates, CBA will need $13 billion, ANZ $11.9 billion, Westpac $11 billion and NAB $5.1 billion.

Banking stocks officially in correction

News that our banks will need extra capital injections, and with the outlook of further super profits diminishing among a challenging regulatory environment and potential property bubble, has caused a plunge in the bank’s share prices.

Since the peak only weeks ago, ANZ’s share price is now down 14.1 per cent, CBA down 14.3 per cent, WBC down 19.4 per cent and NAB down 14.0 percent.

Foreign investors who purchase existing residential dwellings illegally, and third parties who knowingly assist, will face increased penalties under a new bill to be introduced into Parliament this Spring.

Coinciding a day after the Foreign Investment Review Board’s (FIRB) annual report showed a 95 per cent increase in applications by foreigners legally purchasing Australian real estate (‘Foreign investment propels Sydney, Melbourne property bubbles‘), Prime Minister Tony Abbott announced the strict new penalties. Foreign individuals breaching the law will face 3 years jail time and fines up to $127,500. Corporations could be fined up to $637,500.

Real estate agents, developers and third parties assisting with the illegal transaction will be hit with civil and criminal penalties up to $42,500 for individuals and $212,500 for companies.

While legal transactions have surged, it is unclear just how many illegal transactions are taking place. Part of the problem, according to the current government, is the Foreign Investment Review Board is under-resourced in the enforcement area with a lack of specialist investigative staff. The result – not one prosecution during the past 6 years.

Consistent with the consultation paper released in February (‘Australia set to tackle Foreign Investment Surge in Residential Real Estate‘), the Foreign Investment Review Board will be relieved of all residential real estate functions. The Australian Taxation Office with strong compliance and enforcement skills, sophisticated data-matching and a proven track record in pursuing court action will get the job.

The taxpayer will no longer foot the bill for screening and compliance operations, with a levy being placed on applications. Residential properties valued up to $1 million will attract a token fee of $5,000, with no further details released for more expensive properties. The February consultation paper suggested properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter.

The Foreign Investment Review Board may not be entirely at fault, but rather a scapegoat for bad policy. In December 2008, three months after the collapse of Lehman Brothers and with Australia’s house prices down 4.7 percent, the Rudd Labor government ‘streamlined’ the administrative requirements of the Foreign Investment Review Board. With widespread economic panic, you would expect the government would have better things to be doing than streamlining administrative requirements, but as Australian’s would later find out, the legislation was designed to strategically open the flood gates for foreign buyers to purchase property unhindered and put a floor under Australia’s housing bubble. (‘Real Estate Investment by Foreign Residents : Top Secret‘)

Time will tell if the bill makes it into legislation, or if it’s just window dressing. The current government hopes these reforms will commence on the 1st December 2015.

The International Monetary Fund (IMF) will send an economic team to Australia next month to check up on Australia’s housing bubble and the increasing risk it poses to the economy, according to a report in the Australian Financial Review today.

James Daniel who will lead the team next month told the AFR, “My first impression from 30,000 feet is that house prices have gone up a lot in Australia, so that will be a big part of the discussion.”

Another part of the discussion will be what (if anything) the government is doing to prevent the bubble, “Even if you were to take the view that house prices are frothy or overvalued, what is the policy response?”

The Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the government has all failed in attempts to get the situation under control. The current government refuses to quarantine tax breaks such as negative gearing and is being passive about foreign investment. The Reserve Bank of Australia tipped fuel on the fire in February, cutting the official cash rate by 25 basis points.

The team is also concerned with Australia’s record high household debt levels, some of the highest in the world, saying, “House prices and household debt are very related.”

Concerns are mounting that Australia’s big banks are disregarding risk and may not be capitalised enough to withstand a conceivable property correction.

Today, the Australian Financial Review reported Sydney home prices are growing five-times faster than wages. Such rapid increases in property prices over one’s ability to service the mortgage has caused ratings agency Moody to warn the risks of mortgage defaults in Sydney and Melbourne is increasing.

According to Moody, a single breadwinner household in Sydney would be spending an “unsustainable” 70 per cent of their income on the mortgage. With interest rates at abnormal lows, levels not seen in decades, fear is starting to mount the risk of default and delinquency will multiply when interest rates return to more normal levels.

This view is one shared with the banking regulator, the Australian Prudential Regulatory Authority (APRA), who last year opened its macro-prudential tool kit and provided guidelines to the banks to stress test buyers with a minimum 7 per cent mortgage rate, providing borrowers a buffer for when rates return to normal.

The Australian Financial Review revealed last week (‘How National Australia Bank circumvents rules to stop a property bubble‘), National Australia Bank is not abiding by these guidelines for more risky property investors who currently own one or more investment properties and are seeking new mortgages to expand their portfolios. Rather, a confidential NAB mortgage calculator shows it is applying the current mortgage rate, which can be as low as 4.29 per cent.

This comes on top of earlier reports showing National Australia Bank has increased lending to property investors by 13 percent last year, when APRA said it would not like to see growth exceed 10 per cent – another macro-prudential measure.

The big banks imprudent desire to operate with razor thin capital to enhance super profits could be significantly impacted by Australia losing its coveted AAA credit rating, a result likely with further deterioration of the federal budget and a dysfunctional government. The Financial System Inquiry (FSI) chairman David Murray said today if the government lost its AAA rating, the downgrade would hit our banks who rely on foreign funds underwritten by the federal Treasury. Murray, CEO of the Commonwealth Bank of Australia between 1992 and 2005, holds the view our banks are under-capitalised and a growing risk to the economy as they lend excessively to our “housing casino”.

Mead told Fairfax, “In five months since [the introduction of macro-prudential tools] we’ve seen a continuation of a strong property price rally in certain markets,”

With many of the banks ignoring APRA’s macro-prudential guidelines, Mead commented “These sorts of macro tools are important, but don’t appear to be working.”

“The way to reduce this risk is to have a banking system that is even more robust. Asking banks to raise more equity capital is a way to de-lever the system, and I would argue the long term benefit to the shareholder is that their bank becomes more resilient.”

The Murray FSI report last year published findings of a stress test conducted by APRA showing a mining downturn, rising unemployment and a housing correction “would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising.” (‘Australian banks not the safest in the world – far from it.‘)

Reserve Bank Governor Glenn Stevens told a New York audience there is too much focus on the ‘exuberant’ Sydney property bubble. Addressing The American Australian Association luncheon, Stevens said: “Then there are dwelling prices, which, at a national level, have already risen considerably from their previous lows, at a time when income growth has been slowing. Popular commentary is, in my opinion, too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80 per cent of Australia. That said, it is hard to escape the conclusion that Sydney prices – up by a third since 2012 – look rather exuberant.”

As we have reported over the past couple of months, the central bank has been unable to cut the official cash rate further after igniting the property bubble in February with a 25 basis point cut. Meanwhile the rest of the “real economy” suffers. Mr Stevens says “A balance has to be found.”

Last night’s comments could be seen as an indication the Reserve Bank will look beyond, or side-step, the Sydney property bubble when it sits in two weeks time to consider the official cash rate setting. But it could also be more jawboning, as the risks in doing so are too high to ignore. The central bank is worried about our record level of household debt, the highest in the Advanced world according to Barclays.

Stevens remarked last night, “The extent to which further increases in leverage should be encouraged is not easily answered, but nor can it be conveniently side-stepped. Even if we chose to ignore it, monetary policy’s ability to support demand by inducing households to bring forward spending that would otherwise be done in future might well turn out to be weaker than it used to be. For a start, households already did a lot of that in the past and, in any event, future income growth itself looks lower than it did a few years ago.”

And then there is the strong message for our dysfunctional government. The RBA can’t do all the heavy lifting via monetary policy:

“Across much of the world, too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high. Monetary policy alone won’t deliver that.”

Will the central bank cut next month? – or is the bank out of ammo and crying out to our government for some intervention?

The Oireachtas banking inquiry, underway in Ireland, has heard of expert accounts on the vital role the Irish media played in hyping one of the world’s largest property bubbles.

University College Dublin academic Dr Julien Mercille told the inquiry, “A number of journalists simply acted as cheerleaders for the property sector.” He said the Irish Times and Irish Independent both had investments in property related websites and made money from property advertising that impacted editorial standards.

It’s a claim refuted by former editor of the Irish Times, Geraldine Kennedy who said Editorial standards where not compromised by revenue from property advertising. “There was no trade-off between editorial and advertising. Advertising features were clearly signposted. Advertisers did not write editorial copy,” she told the inquiry.

Dr Mercille told the inquiry, the media’s ineffectiveness in predicting an impending crash was contributed by three factors – close ties with corporate and government interests, reliance on advertising, and the sourcing of stories. Quoting independent Irish politician and former business editor of the Sunday Independent, Shane Ross, Dr Mercille said “advertising would go elsewhere” if any media outlet gave unfavorable coverage.

On the 12th September 2011, the ABC’s Media Watch reported (‘Biting the hand that feeds, Episode 31‘) on an email sent from Jason Scott, Managing Director of News Limited’s The Sunday Times in Western Australia, apologising to “our valued real estate clients”. The paper had published an unfavourable article suggesting it can cost as much as $20,000 to sell through a real estate agent and reported on two vendors who did it alone. Media watch noted it was the Managing Director and not the Editor in Chief – normally responsible for editorial content, that wrote the apologetic email.

The apology was prompted by Mark Hay, an Investment property specialist who sent an email to almost every real estate agent in the state, suggesting to take their advertising elsewhere, “Can I encourage you to boycott the paper in light of this, or better still this is a perfect reason why we as agents should build our own web site to challenge realestate.com.au [part owned by News Limited] and the others who keep putting the squeeze on us. Anyone interested?”

Dr Mercille responded with a yes to the question if journalists could have predicted the size of the Irish property bubble and the crash when asked by the inquiry, saying analysts working for the papers “invariably [provided] upbeat analysis” and always said it would be a soft landing.

Dublin Institute of Technology media lecturer and former Irish Times journalist, Harry Browne said consumer behavior was fueled by “property porn” produced by the media, both print and television. Prior to the economic collapse the media would deny there was a bubble, “Before 2008, the media tended to largely ignore it and it is only months after it had started deflating that reality had to be faced.”

“Australia is vastly uncompetitive, I don’t think they want to openly say it, which is why they put a lot of fudge and nonsense in the minutes today” commented Michael Every, head of Asia-Pacific markets research at Rabobank after last month’s cut to the official cash rate.

Michael Every is, of course, referring to the stubborn Aussie dollar making Australia uncompetitive in the international market place and resulting in the loss of jobs from manufacturing to back office.

Stephen Walters, an Australian economist with JP Morgan summed up the severity of problem earlier last month with just two graphs:

According to the data, the average Australian wage is 70 per cent above the global mean, the minimum wage is 100 per cent the global average, electricity is 50 per more and gas is 150 per cent more than the global average.

Only today, Dr Bob Baur, chief global economist at Principal Global Investors said the Australian economy is struggling because “wages are too high”, Australians get too much annual leave and are too hard to fire. “In the US, we get two weeks’ vacation, so three or four weeks at one time (as in Australia) is not something that’s natural, at least in the US — it is in Europe, but then, Europe is not growing terribly fast either.”

The other reason why our labour rates are considered high globally is due to our strong dollar. The mining boom has seen a bad bout of dutch disease creep in as the dollar surged above parity with the USD. Today, a currency war and an internationally high official cash rate have seen a flight of money heading into Australia. Sending the dollar lower is considered one way of increasing Australia’s competitiveness and this is likely to be easier than getting all Australians to take a 38 per cent pay cut (New employees at Coca-Cola Amatil to earn 38 percent less).

The statement from the Reserve Bank of Australia on today’s monetary policy decision indicated:

The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

The Australian economy is now in worst shape that this time last month. Unemployment hit 13 year highs last month, according to figures from the ABS. Capital expenditure is falling faster than expected and a slowing China, forced its central bank to cut rates on Saturday.

But the Reserve Bank was unable to act today due to increased risks posed by the housing bubble. After cutting the official cash rate last week, irrational property spruikers have been drumming up insatiable appetite for housing, especially in the overheated Sydney market. One commentator, ex RBA, said the market was racing away like an “out-of-control freight train.” Needless to say, this has serious consequences for Australia’s banking system.

The RBA reiterated its joint effort with other regulators to control the dangerous bubble in its monetary policy decision statement:

The Bank is working with other regulators to assess and contain risks that may arise from the housing market.

But until this framework is in place, the RBA might have to sit and wait tight.

Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.

According to Foreign Investment Review Board (FIRB) statistics, The House of Representatives Standing Committee on Economics’ report indicated that “approved” foreign investment in Australian residential property has been surging in recent years. It cited in the first 9 months of last year, prior to the release of the report, foreign investment surged 44 per cent compared to all of 2012-2013 with “much of this investment [..] concentrated in the Melbourne and Sydney markets.” Fairfax tabloids in Sydney and Melbourne have been littered with articles of Chinese buyers outbidding locals with prices exceeding reserves in the hundreds of thousands.

Leading property experts say the Sydney property bubble has been in “hyperdrive” with prices surging almost 30 per cent in just two years, creating a challenge for the Reserve Bank of Australia who is keen to slash the official cash rate to stem rapidly rising unemployment. With house prices at ten times income, Sydney is the third most expensive city in the world for housing following Hong Kong and Vancouver, according to the most recent Demographia survey. Melbourne is not far behind as the fifth most expensive city in the world for shelter.

It is unclear what contribution Foreign investment is making to surging home prices. The Australian Bureau of Statistics (ABS) told the House of Representatives Standing Committee on Economics inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment:

“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.

Treasurer Joe Hockey said today, “At the moment we simply do not have enough data and that’s because no-one has taken foreign investment regimes seriously in the past.”

Currently flouted legislation do require all foreign persons to gain approval prior to purchasing residential real estate in Australia. To encourage the supply of new homes, non-residents can only apply to purchase newly constructed dwellings or vacant land for development. Given that temporary residents residing in Australia need a place to live, temporary residents may purchase one established dwelling to live in, but must sell the property when they leave Australia.

Today’s consultation paper recommends the introduction of fees for foreign buyers of Australia’s residential real estate. A token application fee of $5,000 would apply for properties under $1 million dollars. Properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter. The report notes the FIRB and Treasury (who provides secretariat support to the FIRB) is currently funded through consolidated revenue and suggests the Australian Taxpayer should not bear the costs of foreign audit, compliance and enforcement operations – sensible budget savings.

The report on Foreign Investment in Residential Real Estate released last year also recommended a user pay model but with a modest fee of only $1,500 to fund “enhanced audit, compliance and enforcement capacity within FIRB.” On the other extreme, Today’s report notes countries such as Singapore and Hong Kong levy an additional buyer’s “stamp duty” of 15 per cent of the purchase price. (Maybe we could do the same with proceeds to help fund the Committed Liquidity Facility?)

Just as laughable as the ABS scanning magazines to ascertain foreign investment is the FIRB’s track record on enforcement. It’s a point not lost on Prime Minister Tony Abbott who said in a National Press Club speech last fortnight, there had not been a single prosecution in six years.

The consultation paper highlights, “while the Foreign Investment Review Board and Treasury were well placed to continue undertaking the upfront screening of residential real estate applications, its internal processes and lack of specialist investigative and enforcement staff have weakened the enforcement of the foreign investment rules.”

A recommendation is to create a new “specialist, dedicated compliance and enforcement” unit within the Australian Taxation Office to enforce foreign investment legislation for residential real estate. It suggests the tax office is better suited as it has staff with compliance and enforcement skills, sophisticated data-matching and “experience in pursuing court action”, i.e. a proven track record of getting results!

Hot on the release of the Murray report, the Australian banking regulator (APRA) and the Australian investment and security regulator (ASIC) has today exposed teeth as they start growling and barking at our reckless banks.

Both regulators have launched an attack on prevalent risky residential mortgage lending practices, targeting in particular, loans to the overheated investor market.

According to reports, APRA has written to the banks today, telling them growth in loans to property investors should not exceed 10 per cent. APRA warns it stands ready to raise capital requirements early next year if banks do not take a more prudent approach to mortgage lending.

ASIC has today announced surveillance operations into interest only loans. In the September quarter, more risky interest-only loans reached a record high of 42.5 per cent of all loans issued. More property investors than ever before are betting prices will only go up, raising alarm bells among regulators.

The Council of Financial Regulators – comprising of the Reserve Bank of Australia (Chair), the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury – are working diligently on measures aimed to try to bring the unbalanced investor led Melbourne and Sydney property bubbles under control, before it starts to undermine the banking system.

It is understood, slightly less senior members of each council agency are on a working group determining and risk assessing the most appropriate measures and reporting back to the council. The council is expected to brief Treasurer Joe Hockey of their proposal prior to execution.

Earlier this month, Assistant RBA governor Malcolm Edey optimistically said to expect an announcement before the end of the year, however APRA chairman Wayne Byres wasn’t as convincing as he told a Senate Economics committee on Wednesday, it hasn’t reached a point where we have decided anything, going as far to say “it might be nothing.”

One of the challenges of the Macroprudential policy framework is accurately targeting the risky activity without shifting the problem elsewhere. The council has risky loans provided to naive and overconfident property investor’s firmly in its sight. Currently investor loans make up almost half of all lending. It certainly does not want to introduce policy to hinder dwindling first home buyers.

“We’re keeping a close eye on the build up of credit to investors in the housing market, not to owner-occupiers per se and certainly not to first home buyers. They’re not the issue,” said RBA governor Glenn Stevens.

Another challenge for regulators is targeting the specific problem markets. While Australia has a sizeable housing bubble in all states and territories, the current concern is the unsustainable activity in both the Sydney and Melbourne markets. “What the community wants is sustainable competition and sustainable growth, not something that accelerates through the roof and then drops through the floor,” said Wayne Byres.

The most recent data from the Domain Group (formally Australian Property Monitors) suggest house prices are starting to correct in the rest of the country. In the September quarter, Canberra home prices recorded a 1.7 percent fall, followed by Perth with a 1.5 percent decline, Hobart and Brisbane both recorded drops of 1.3 percent and Adelaide fell 1.0 percent.

It is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this on to the borrower though higher interest charges. On Wednesday, Wayne Byres said in his opening statement to the Senate standing committee on economics:

First, within our regulatory framework APRA generally seeks to avoid outright prohibitions on activities where possible: instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk. We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements.

New lending finance data released by the Australian Bureau of Statistics (ABS) today show the Sydney property bubble is now undeniable as it continues its dangerous acceleration – unchecked.

Investors are starting to feel the strain as they fight each other for tenants in an oversupplied marketplace. With August figures showing 60 percent of all new home loans in NSW is for the purchase of an investment property, the highest ever, rents are starting to fall. According to the Domain Group, apartment rents have dropped below $500 a week to $495. Rents for houses remain static at $510 a week.

Rents are also falling in Perth and Canberra, while rents remain static in all other states – failing to keep up with inflation.

After a fruitless attempt to talk down the high Australian dollar, Glenn Stevens has today embarked on a new project – talking down house prices.

The jawboning comes after overwhelming evidence suggests Australia’s property bubble, already one of the biggest bubbles in the world, is accelerating out of control fuelled by record low interest rates.

It has put the central bank in quite a bind, with one hopeless instrument – the official cash rate – to manage inflation, booming housing prices, the excessively high Aussie dollar and surging unemployment. You could easily call it mission impossible.

Increasing interest rates at this point in time to combat the frothing property market, would cause an appreciation in the dollar, exposing trade exposed industries to even more heartache. For much of the past year, Stevens has been trying to talk down the Australian dollar – all in vain.

Today, Stevens said the bank was unable to further drop interest rates to cushion our faltering economy due to our housing bubble:

In our efforts to stimulate growth in the real economy, we don’t want to foster too much build-up of risk in the financial sector, such that people are over-extended. That could leave the economy exposed to nasty shocks in the future. The more prudent approach is to try to avoid, so far as we can, that particular boom-bust cycle. It is stating the obvious that at present, while we may desire to see a faster reduction in the rate of unemployment, further inflating an already elevated level of housing prices seems an unwise route to try to achieve that.

Stevens is not the only banker ring alarm bells. ANZ chairman David Gonski said yesterday that a correction in Australia’s housing market is inevitable. He said banks “are very aware of history. They know that you can have the growth in prices that we have had and over time and there will be a correction,”

“But the fact is anybody who believes that prices will always go up is a fool,” remarked Gonski.

Ratings agency Moody’s has warned our banks are writing more risky loans with the proportion of investor loans, interest only loans and subprime loans increasing. An analyst for Moody’s, Robert Baldi, even went as far as saying “Australia is out there at the front of the market” in issuing subprime loans. Moody’s senior credit officer Ilya Serov said “The increase in higher-risk lending is credit negative for Australian banks because it weakens the credit quality of their portfolios,”

Ex Commonwealth Bank of Australia CEO and now chairman of the Financial System Inquiry, David Murray, warns real estate is now the biggest risk to the Australian economy.

Two weeks ago, the United Nations warned the Australian housing asset bubble need to be “closely monitored.”